In a February 2009 speech at the Marcus Evans conference on “stress testing,” Andrew Haldane — then executive director for financial stability at the Bank of England — noted his first run-in with market realism. He recounted a discussion he had been a part of, in which bankers were asked about the need for more severe stress-test scenarios than were currently in use by banks. Haldane says the bankers responded that “in that event, the authorities would have to step in to save a bank and others suffering a similar plight.” Based on the results of this week’s CFA Institute Financial NewsBrief reader survey, investors’ expectations have not been changed by what legislators, parliamentarians, central bankers, or regulators have done in the nearly five years since the failure of Bear, Stearns & Co.
Asked about the most important investment lesson they’ve learned over the past five years, 59.5% of 999 survey respondents said it is that central banks and governments will continue to bail out troubled creditors. Even worse, slightly more than 9% of respondents believe that institutional creditors will be more prudent in their lending in the future. In the parlance of economics books, this situation sounds like a recipe for moral hazard. Just 3.6% of respondents agreed that financial regulations adopted since 2008 will prevent systemic failures in the future — a similar percentage to that of a broader CFA Institute poll taken in July 2010, immediately after the passage of the Dodd-Frank Act. In the July 2010 survey, only one response apart from the statement on bailouts was seen as credible — namely, that equity market structures are negatively affecting market trust (24%).